Anyone who's read Paul Volcker's testimony to the Senate yesterday might be wondering whether now's the time to get out of banking and into something a little more lightly regulated.
Notably, Volcker said:
Apart from the very limited number of such "systemically significant" non-bank institutions, there are literally thousands of hedge funds, private equity funds, and other private financial institutions actively competing in the capital markets. They are typically financed with substantial equity provided by their partners or by other sophisticated investors. They are, and should be, free to trade, to innovate, to invest - and to fail. Managements, stockholders or partners would be at risk, able to profit handsomely or to fail entirely, as appropriate in a competitive free enterprise system.
By comparison, investment banks are (according to Volcker) rife with conflicts of interest and in need of dissection in order to prevent their participation in hedge funds, private equity, or anything resembling proprietary trading of the kind performed by, "aggressive, highly remunerated traders."
However, before seeking shelter from the wrath of Volcker in the likes of Citadel or KKR, it's worth bearing in mind that (as we have noted previously), much of what he says may be a lot of hot air.
The Financial Times pointed out earlier this week that Volcker's proposals have limited chance of making it through the Senate. Richard Shelby, the top Republican Senator on the senate banking committee isn't in favour of them; nor is he in favour of Obama's bank tax.
Shelby's support is necessary because after losing Massachusetts Obama doesn't
have the 60 votes he needs to force the financial reform bill through on Democrat votes alone.
Moreover, Chris Dodd, the Democrat chairman of the Senate banking committee isn't thought to be very enthusiastic about going into battle against Shelby on Volcker's behalf. Dodd's already spent months working on a financial reform bill which has already been stuck in committee due to wrangling with the Republicans over consumer protection reforms.
Adding Volcker's ideas to that bill at this late stage risks derailing it even further and is unlikely to be particularly palatable to him (particularly as he's on the verge of retirement). Dodd said yesterday that Volcker's ideas are 'adding to the problems of trying to get a bill done.'
So, while Volcker's proposals are potentially intimidating, acting on that intimidation is distinctly premature. Yes, Citigroup is offloading its private equity and hedge fund units, but these sales were tabled long before Volcker came back on the scene.